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EU fails to adapt to borderless world

Jake van der Kamp

BIO

Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.

The European Union's loss of revenue from tax fraud and evasion was €1 trillion, said the president of the European Commission, Jose Manuel Durao Barroso

South China Morning Post, May 23

I do not entirely follow the reasoning of this notable hot-air merchant. If the European Union truly has evidence that its citizens, personal or corporate, defraud it of €1 trillion a year, why do its law-enforcement agencies not take action?

The financial fugitives may have taken the money abroad, but they still made it within the EU, where EU agencies rule. If hard evidence of fraud or tax evasion exists, then the EU cops should be able to nab them in the EU or seize the EU-domiciled assets from which the money was made.

And if they do not have this hard evidence, how do they expect governments outside of the EU to enforce EU demands for payment on the basis of claims not acceptable to courts of law within the EU?

What the EU really wants, of course, is a long list of citizens who have bank accounts in Luxembourg and Switzerland. It will treat this as sufficient evidence of wrongdoing, demand a big dollop of the money from these people and then proceed to grind them down with legal processes. The torturer's approach is much favoured in Brussels.

But the EU's real problem is that it still thinks of money as geographically confined within national borders although money now ignores borders as it never has before. This makes a mockery of taxing personal income and corporate profits. Increasingly they cannot be geographically defined.

It is this difficulty that makes EU tax codes so hugely complicated. The taxmen are trying to fit a square stopper in a round drain and, not surprisingly, the sink always leaks. These leaks, however, constitute tax avoidance, not tax evasion, and it is entirely legal for people to take advantage of them. In fact, directors of public corporations have a fiduciary duty to their shareholders to do so. It is not their fault that the EU persists in the Sisyphean task of trying to define the indefinable.

But it certainly explains Barroso's evident frustration. "Give me my share of your money," he demands, and back comes the answer: "Yes, sir, every cent that, by law, we owe you. And precisely how much, by law, is that?"

And he cannot give a precise answer. He can only write a bigger book of tax codes. Yet every time it only makes things worse for him.

Let's also clear up some other misunderstandings. Revenues that the EU cannot raise may be a loss to EU governments but are generally a gain to EU economies.

In the hands of EU bureaucrats the money would only be used to buy weapons, fund the profligacy of wastrel EU member states, or translate endless memos on butterfat composition into 32 different EU languages and dialects.

Out of government hands, the money is efficiently invested to bring EU citizens the goods and services they most want at prices they can afford. It's the same reason that corruption is generally good for China. It puts the money where the money is best used. And it does not deprive the poor of their means. Efficient investment rather contributes to narrowing the income gap. An example of what widens it is overpaid bureaucrats flying back and forth, first class, to endless talk shops on solutions to poverty.

To relieve poverty, give the poor opportunity. It is best done by removing the weight of government from their shoulders, as it is the poor who invariably bear the real brunt of government revenue exactions. The rich always pass the burden to the poor. But most poor countries are poor because their economies are made inefficient through public policy measures. Shortage of money is rarely the problem. The money will come if the opportunity is present, which will generally happen if governments stop making economic choices for their people.

The best immediate advice for Barroso and his EU member states, however, is to take a leaf from Hong Kong's book. Try spending no more money than you raise, sir. It's an unusual idea in Europe, I know, but try it.

Here is another Whacko Jakeo who makes the monstrous statement that corruption is generally good for China and money hidden by tax avoidance is used efficiently.
Corruption undermines and destroys the very fabric of society, rewarding the rich and dishonest while damaging the interests of the common people.
Tax avoidance (we really are talking about tax evasion here) means the rich pay little or no tax while the tax burden to pay for all the activities and services governments render to the public, including the tax evaders, falls on the less well off who pay all the tax.
Next you will be arguing that evil and unfairness are good.

As one grows older one becomes more conservative. That is, more inward looking and self-centering. Jake seems to be aging fast. His school of economic belief has been small government for society. It was nice to have him defending since many years ago against government spending money to protect copyright holders. But I am disappointed he has turned to efficiency as the ultimate yardstick for our free market. He even includes today corruption practice as a means to justify market efficiency. I hope he doesn’t grow old that fast and live too close to mainland China seeing only what corruption have done so far in driving economy. Even in China, corruption is now treated as a public enemy by the new leadership. There is no future in that kind of efficiency to a country or a place. All those cash only benefits the property developers in Hong Kong at the expanse of the general public. Believe me.

impala May 26th 201311:35am

Oh yes, and then the most blatant thing: Mr van der Kamp singlehandedly re-interpreting Mr Barroso's comments about tax evasion and fraud as if they are concerned with tax avoidance.

No. Just no.

Mr Barroso was NOT talking about tax avoidance. Tax avoidance is, indeed, the legal tax optimisation tactics especially used by multinational corporations. Those are an eyesore too, but that is arguably a much more complex and grey area that has to do with the internationalisation of business etc. But that is NOT what this is about.

Mr Barroso was talking about tax EVASION. That is: blatant fraud. This is the non-declaration of income and assets. By hiding them offshore for instance (Luxembourg, Switzerland, beyond...). Or by keeping them off the books (invoice at half the amount, the rest in cash, in a brown bag). Or by just outright lying about them (those swimming pools in Athens for instance).

Tax evasion like that is criminal. It is pure and simple a selfish circumvention of democratically established laws of taxation (again: not by the EU, which doesn't tax, but by national member states). And mostly this happens by the rich, who thus put an uneven tax burden on those in society who do pay their taxes honestly.

The EU is far from perfect, and of course there is government resources being wasted to at least some extent everywhere (yes, even in Hong Kong), but that Mr van der Kamp is condoning and defending tax fraud is scandalous.

1. The EU has no powers of taxation, and hence there is no such things as 'demands for EU payments.' Taxation happens by the member states, independently.

2. If Mr van der Kamp thinks that all or some EU member states tax too much, then let's talk about that. Blaming the EU for it is nonsensical. There is nothing in the EU that encourages spending or taxation by member states. If anything, EU fiscal compact rules limit member states' spending; they certainly don't encourage it.

3. So, which EU member states budgets would Mr van de Kamp see slashed? Is it the UK's (2012: deficit of 6.3%)? Germany's? Italy's? We have now arrived at the well-known austerity branch of economics that has scored such successes over the past 5 years. What would Mr van der Kamp like to slash in the budgets? Education? Healthcare? Welfare? Pensions? Let's hear it please. Just blaming the EU in abstract is easy, putting the pain in the budget is a different story.

4. That Mr van der Kamp is proposing -with dry eyes- that the EU takes a leaf out of Hong Kong's book is really astonishing. Hong Kong's poor have opportunity? How is that working out for the 50% of the population that is earning below the median income of HKD 13k? A median income that by the way, has risen <10% in the past 10 years, and that is nominal, not even adjusted for inflation (real incomes have been falling).

Stefan Steinfeld May 26th 201310:11am

Jake: Great contribution and I agree with all but the part about corruption. Sure, you narrow that assertion down by adding "in China". I cannot comment on corruption there in particular but I live in one of the most corrupt countries in the world and based on what I observe here every day, the disadvantages of corruption outweigh any benefits that it could have. If you consider corruption only from the point of view of getting things done more efficiently - e.g. that a license you get more quickly and more easily by bribing a corrupt official - then you may be right. But wide-spread corruption has downsides that by far outweigh the benefits of such efficiency: it usually tends to over-proportionately benefit a small group, which often do not have the entrepreneurial spirit and background to make more out of their ill-gotten gains. They more often than not also forget all about ethics and do not care if by looking the other way they are putting others at risk. Corruption may perpetuate and even increase the erstwhile inefficiencies that favor the existence of corruptive practices because as long as a few powerful control this source of income, there will be no incentive to change. Ultimately, I would even claim that it increases the cost of doing business, saps away income from more deserving parts of the population (workers), fosters illicit practices and organized crime and it leads to frustration and a gradual decline of ethics in the broader society.

johnyuan May 26th 20138:31am

Today’s column is quite a mix-bag of things not short of round hole and square peg. A simple understanding should be put at the front of all the arguments raised in the column. Government needs revenue to keep its entire people to live an orderly life as a society. Some may differ from my premise. I will use US tax system to see both of its success and failure.
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US has pursuit a universal income tax that filing income tax and paying tax by all its residences and citizens if due regardless where one makes the money – no world geographical boundary restriction.
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The idea taxing rich less to create economic activities with trickledown effect since President Reagan years proved to be a big failure. Excess money in great amount earned by individual requires great discipline to spend it. It is easier just keeping it idling. US is out of balance still.
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Returning to my premise, Hong Kong government has had its low tax myth for a long time. It hordes its revenue in trillions. No objection from the wealthy because they do so too. Jake may be a benefactor being smart and able.